Recession calls for stimulus and the budget delivers on that front, economists say

By Melissa Coade

May 14, 2021

The marble hall. (Image: Adobe/Debu55y)

The stimulus of the federal government’s big spending budget is what Australia needs right now, according to a Mandarin Talks panel of experts, but it is strange territory for the Coalition and therefore also ‘an experiment’.

Australian economist and CEO of Lateral Economics Nicholas Gruen said this week’s budget has delivered just what Australia needs after the downturn brought about by COVID-19: stimulus. 

Government measures to respond to the pandemic recession will see the deficit reach $161 billion this year, and projected to drop to $57 billion in 2024-25. By June of 2025 the budget papers forecast that net debt will peak at $980.6 billion or 40.9% of GDP.

You expect [stimulus] in politics — everybody is doing this,” Gruen said, citing a similar big stimulus approach adopted by the Labor government when the Global Financial Crisis hit.

The government has basically taken an old narrative and thrown it away until further notice. No doubt that it will come back at some stage, but it makes sense and we should be doing roughly what the government is doing.”

Inflation on the horizon calls for strategy

Gruen said he was hoping to see inflation tick up and, when it does within at least the next two years, the government’s economic response would become a more difficult question. 

The Reserve Bank of Australia’s plan to run the economy fast enough to meet inflation targets is well known, Gruen said — and he agrees with this approach — but the topic has also been strangely absent from Australian economic debates.

“I’m not going to be surprised if inflation comes back as an issue within a year and a half or so — and that’s kind of a good thing, so long as we have a strategy. 

“But it’s very difficult to navigate that process of building higher inflation expectations into the system from below 2% to somewhere like preferably 3% for several years,” Gruen said.

“We built a capital structure in our economy which is predicated on very low interest rates.”

“The question does become: What do you do when that output gap is closed? […] What happens then?”

A ‘big spending’ budget experiment

Public sector governance expert Stephen Bartos said it was hard to find anything wrong with the spending items in Frydenberg’s budget — the investment in aged care, childcare, preschool and mental health were all desirable and essential commitments.

Even if advocacy groups or think tanks such as the Grattan Institute have critiqued the budget for not delivering enough, Bartos notes that the money is locked in and the government is likely to keep spending.  

The federal 2021 budget saw the treasurer approach commonwealth spending ‘with the aim of stimulating an already growing economy by throwing more money into it — and keeping on doing that for the foreseeable future’, Bartos said.

The interesting and really different thing is the overall budget strategy — this is the first budget Australia has ever had that is pro-cyclical.

“The economy is growing strongly and they’re stimulating it to grow even more, which is I think the first time that Australia’s done that — at least deliberately,” he said. 

Bartos, who previously served as a NSW parliamentary budget officer and is a former deputy secretary of the Commonwealth Finance Department, joined The Mandarin’s team of journalists for the budget lock-up where he filed a compelling overview of the government’s spending strategy

Echoing the theme of his Tuesday budget op-ed, he noted the government’s goal was to deliver some kind of benefit to everybody, either through tax cuts or spending assistance. While he agrees with the budget strategy, he also notes that it will be interesting to see if the plan works out as positively as some of the budget forecasts expect.

If you look at the tables at the back of the budget [papers], look at the percentage of government payments as a percentage of GDP. This current financial year we’re in is the highest in that recorded series, which goes back 30 years,” Bartos said.

“We’ve got a complete change in what the government is trying to do with the economy and I think it’s almost a bit of an experiment.”

“The budget is being funded by debt but that is not a problem — the treasurer is absolutely right on this. If the rest of the world is prepared to continue to loan money to us at derisory low interest rates, and the economy has absolutely capacity to repay any of that debt — it’s right to get unemployment down as low as possible,” he added. 

Public sector pressure for universities and the ABC

A big winner of the budget was the public sector, which Bartos described as a ‘turnaround’ of historical trends to keep these jobs low. 

“The number of public servants has grown at a rate twice the rate of growth of the economy, as a proportion increasing.”

“Almost everybody has seen an increase, the exception amongst departments of the Australian public service is Services Australia where the additional funding during COVID-19 has been removed,” he said. 

The public sector as a percentage of GDP is above 25% for the foreseeable future.”

But Bartos also noted that the budget let down two major public sector groups — universities (with no new financial budget support despite the ongoing impact shut borders are having on international student revenue) and the ABC (whose funding between 2021-22 and 2024-25 will decrease by 6% as a result of a 2018 decision to pause the broadcaster’s indexation funding). 

“You can’t help but feel there are still lingering legacies of the Howard years’ culture wars in relation to universities and the ABC, and feeling that they are no longer on the Coalition government’s side so ‘why would you support them?’,” Bartos said.

Border closures cannot last forever

The ongoing negative economic implications of maintaining Australia’s shut borders was also something that piqued the interest of senior economist for the Committee for Economic Development of Australia (CEDA) Gabriela D’Souza. She noted that Australia’s population growth number (0.1) was buried in a table in the budget, proving that earlier government forecasts had been seriously underrated. 

“The government in its July fiscal economic update suggested [population growth] would be somewhere near 0.6. The Centre of Population and Growth came out in December and said it was 0.2 and now we’re seeing it as 0.1,” D’Souza said. 

“So the last predictions on that were a vast underestimate of what it would actually be.”

While the budget forecasts on real GDP growth (1.25% in 2020‑21, rising to 4.25% in 2021‑22), and its aim of driving unemployment down to a figure with a ‘4’ in front were widely expected, D’Souza said the assumption that Australia’s borders would stay shut for longer revealed an interesting narrative. She queried how much this factor impacted the government’s forecasts on consumer spending growth. 

“I know that the government has been saying for at least some of the things underlying their forecasts that there will be an uptick in consumer spending and that uptick will continue.

“Obviously the government has locked its citizens in, nobody can leave or take a holiday anywhere so there has been a corresponding increase in consumer investment,” D’Souza said. 

“I’d bet money that those things are related — Australians spend something ridiculous like $65 billion on overseas travel — so you need to think about that money staying in the country.”

However, D’Souza also warned that the Australian economy could not discount other implications of keeping its borders shut to things like the depressed net overseas migration number (which has stayed negative for two years in a row now). This includes the nation’s reliance on migrants to supply labour for the domestic market, which has intensified over the past 25 years, and the contribution of new arrivals to government through tax revenues. 

“That’s interesting given that our economy is so geared towards migration as a key of economic growth,” she added. 


The expert budget panel was moderated by The Mandarin’s managing editor Chris Johnson on Thursday. 

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